Stock Quotes in this Article: AVAV MIND PLAB OXM DNMD

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see tradable short-squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it’s never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.

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    That said, let’s not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It’s important that you don’t go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you’re letting the trend emerge after the market has digested all of the news.

    Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting extremely bullish technically.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

     

    AeroVironment

    My first earnings short-squeeze idea is an aerospace and defense player AeroVironment (AVAV), which is set to report its numbers on Tuesday after the close. Wall Street analysts, on average, expect AeroVironment to report revenues of $74.51 million on earnings of 20 cents per share.

    This company met Wall Street estimates last quarter, so investors will be looking for a meet or beat this quarter. AeroVironment’s revenue has been trending up for the last three straight quarters. The company saw its gross margin go up by 3.5% last quarter. Revenue soared by 62.2%, while costs of sales jumped 53.8%.

    The current short interest as a percentage of the float for AeroVironment is 8.9%. That means that out of the 16.03 million shares in the tradable float, 1.51 million shares are sold short by the bears. This stock has a very low float and a pretty high short interest. Any bullish earnings news will easily set this stock off on a large short squeeze.

    From a technical standpoint , this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. Since this stock hit a low in August at $24.01, shares have been making mostly higher highs and higher lows, which is also bullish. Now the stock sets up for a breakout trade if it can clear some overhead resistance levels post-earnings.

    If you’re bullish on this stock, I would get long after it reports its results if the stock breaks out above $33.24 to $34.28 on high volume. Look for volume that’s tracking in close to or above its three-month average of 184,535 shares. If those levels are taken out with volume, then I expect this stock to re-test its 52-week high of $36.49.

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    I would only get short or avoid any long trade on AVAV after it has released its results if the stock drops back below its 50-day of $30.84 and 200-day of $30.18 on heavy volume. A high-volume drop below that level should set this stock to re-test some near-term support at $28.65 a share.

    Mitcham Industries

    Another potential earnings short-squeeze play is Mitcham Industries (MIND), which is set to report results on Tuesday after the market close. This company, through its subsidiaries, engages in the leasing, manufacture, and sale of seismic equipment to the oil and gas industry worldwide. Wall Street analysts, on average, expect Mitcham Industries to report revenues of $22.44 million on earnings of 22 cents per share.

    If you’re looking for a stock that’s setting up for a big breakout ahead of their quarterly report, then you should take a hard look at Mitcham Industries. This stock plunged from its July high of $20 to a recent low of $9.52 a share. Since that big drop, the stock has soared to its current level of $15.72, and now sets up for a breakout trade.

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    The current short interest as a percentage of the float for Mitcham Industries is worth mentioning at 5.1%. That means that out of the 10.35 million shares in the tradable float, 600,341 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.9%, or by about 82,200 shares. If the short-sellers are caught leaning too heavy into this quarter, then this low float name could easily explode higher post-earnings.

    From a technical standpoint, this stock is currently above both its 50-day and 200-day moving averages, which is bullish. This stock recently found some buying support at $13.22 a share and now sets up to challenge a breakout on a move above some overhead resistance at $16 a share.

    If you’re bullish on this stock, I would wait until after it reports its results and buy the stock once it breaks out above $16 a share on high volume. Look for volume that’s tracking in close to or above its three-month average action of 116,500 shares. If we get that move, I would then add to any long positions once the stock takes out $17.71 a share. Target a move back toward $20 a share or higher if the bulls gain full control of this stock post-earnings.

    I would avoid any long trades or short this stock after earnings if it drops below its 50-day moving average of 13.42 on heavy volume. I would then add to any short position if it trades below $13.22 with heavy volume. Target a drop back towards $11 or possibly lower if the bears hammer this lower post-earnings.

    Photronics

    An earnings short-squeeze play in the photography complex is Photronics (PLAB), which is set to release numbers on Wednesday after the market close. This company is a manufacturer of photomasks, which are precision photographic quartz plates containing microscopic images of electronic circuits. Wall Street analysts, on average, expect Photronics to report revenue of $121.04 million on earnings of 12 cents per share.

    This company lowered its revenue guidance for this upcoming quarter back on Nov. 8 to a range of $120 million to $122 million, from previous guidance of $125 million to $130 million. It also lowered its EPS guidance to a range of 11 cents to 13 cents, from previous guidance of 14 cents to 18 cents. If it turns out that the bad news has already been priced into this stock, then we could see a relief rally this week when Photronics reports earnings.

    The current short interest as a percentage of the float for Photronics is very high at 12.1%. That means that out of the 52.59 million shares in the tradable float, 7.01 million are sold short by the bears.

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has seen buyers step in to own shares each time it traded under $5 a share in the past two months. The most recent buyers stepped in at $4.95, and now shares have run back above its 50-day moving average of $5.85. This sets up a breakout trade post-earnings if the bulls get what they’re looking for.

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    If you’re bullish on this stock, I would wait until after it reports its earnings and buy some shares if we get a breakout above $6.38 on high volume. Look for volume that’s tracking in close to or above its three-month average action of 772,143 shares. If we get that action, I would then add to any long positions once we take out the 200-day at $7.46 and $7.59 on heavy volume. Target a run back toward $8.75 or higher if the bulls push this stock up post-earnings.

    I would only consider shorting this stock after earnings if it drops below its 50-day at $5.85 on heavy volume. If that level is taken out, I would then target a drop back towards $4.58 a share, or possibly much lower if the bears hammer this stock post-earnings.

    Oxford Industries

    An earnings short-squeeze play in the retail complex is Oxford Industries (OXM), which is set to release numbers on Tuesday after the market close. This is an apparel design, sourcing and marketing company that features a portfolio of owned and licensed brands of clothing and golf apparel. Wall Street analysts, on average, expect Oxford Industries to report revenue of $164.92 million on earnings of 14 cents per share.

    This company is setting up to beat its earnings estimates for the third consecutive quarter this week. Even more importantly, the stock is setting up for a big breakout if the company can deliver bullish earnings and forward guidance.

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    The current short interest as a percentage of the float for Oxford Industries is rather high at 10%. That means that out of the 13.82 million shares in the tradable float, 1.38 million are sold short by the bears. This is another situation of a stock with a decent short interest and a very low float. This could easily turn into a large short squeeze if Oxford Industries gives the bulls what they’re looking for.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock hit a recent low in August at $29.70 a share, and since then it has been uptrending strong. During that uptrend, shares of Oxford have been mostly making higher highs and higher lows, which is bullish.

    The way I would play this name is to wait until after it reports earnings and buy the stock if manages to hold above its 50-day moving average of $37.52. If this stock holds above that 50-day, I would then get long if you see a high-volume breakout over $38.20 post-earnings. Look for a breakout on volume that’s tracking in close to or well above its three-month average 184,729 shares. If we get that action, then look for OXM to rip higher back towards $42 a share, or possibly much higher.

    I would only look to short this stock after earnings if it fails to hold above that 50-day and then drops below some near-term support at $36 a share on high volume. I would target a drop back towards its 200-day moving average of $34.30, or possibly much lower if the bears drive this stock down post-earnings.

    Diamond Foods

    My final earnings short-squeeze candidate is ford processing player Diamond Foods (DMND), which is set to release numbers on Tuesday after the market close. This company specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. Wall Street analysts, on average, expect Diamond Foods to report revenues of $275.31 million on earnings of 72 cents per share.

    Diamond Foods has beaten Wall Street estimates the last four straight quarters and they’re coming off a quarter that they blew out estimates by 8 cents, reporting a profit of 52 cents per share versus net income of 44 cents per share. This company has registered double-digit year-over-year percentage revenue growth for the past four straight quarters. Over that timeframe, the average growth was 43.1%, and the largest growth was 60.7%, which it hit in the third quarter of last year.

    The current short interest as a percentage of the float for Diamond Foods is extremely large at 56.8%. That means that out of the 19.47 million shares in the tradable float, 12.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.9%, or by about 784,800 shares. This stock has a very low float and a monster short interest. Any bullish earnings news here and I expect this stock to soar over 20%.

    From a technical standpoint, this stock is currently trading substantially below both its 50-day and 200-day moving averages, which is bearish. This stock was destroyed by the sellers from its September high of $96.07, to its recent low of $26.94 a share. This massive plunge, which came on huge volume, has created an oversold condition for DMND since its current relative strength index (RSI) reading is 25.41. If the sellers are done and this stock breaks out over some near-term overhead resistance at $30.81 post-earnings, then I expect a huge move higher for DMND.

    If you’re bullish on this stock, I would wait until after it reports earnings and buy some shares if it breaks out above $30.81 on big volume. Look for volume that’s tracking in close to or above its three-month average action of about 1.4 million shares. If we get that action, I would then add to any long positions once the stock takes out $35 with high-volume.

    I would only get short this stock after earnings if it trades back below that major near-term support level at $26.94 on high volume. I would target a big drop if that level is taken out, since that’s exactly where shares bottomed just a few weeks ago.

    To see more potential earnings short squeeze plays, including Men’s Warehouse (MW), Vera Bradley (VRA) and Cherokee (CHKE), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

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    At the time of publication, author has no positions in stocks mentioned.

    Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.